Do You Own Foreign Assets?
James Schofield - May 18, 2023
The US is often referred to as the land of opportunity. These opportunities extend into the realm of investing as many Canadian own rental properies, doubling as winter escape destinations. Some Canadian investors own more US than Canadian stock. As a Canadian taxpayer it is important to remember that owning certain foreign properties can create additional reporting obligations when filing your Canadian taxes. In this article we’ll untangle the complicated rules around Specified Foreign Property (STP).
The Canadian Income Tax Act (ITA) requires all Canadians to report (SFP) above a certain threshold. This reporting is done through form T1135 - Foreign Income Verification Statement, which is filed in addition to the annual tax return. If the total cost of the SFP at any time during the year exceeds $100,000 Canadian, then it needs to be reported, even if some or all of the property was sold before the end of the year. This requirement applies to individuals, trusts, corporations and partnerships, subject to a few exceptions, which are outside the scope of this article.
Specified Foreign Property (SFP):
There is a lot of misunderstanding and confusion when it comes to what an SFP is. Many Canadians think, incorrectly, that an SFP is a real estate property. However, this is a very narrow definition for the SFP. The Income Tax Act defines in detail what properties are defined as SFP. The list is quite extensive, but in this article, we will highlight the four examples we have found to be most relevant to Canadian investors:
1- Shares of the capital stock of a non-resident corporation:
If you invest in shares of foreign companies inside your non-registered account, then you are required to report all income and capital gains from the foreign shares on your Canadian income tax returns. Furthermore, if the overall costs for these shares (even if they are held in a Canadian Brokerage) exceeds $100,000 Canadian at some point in the tax year, a T1135 must be filed for that tax year.
If the shares are held in registered accounts such as an RRSP, RRIF, or TFSA, there is no T1135 requirement. In addition, Canadian mutual funds and ETFs that invest in foreign companies are not considered SFP, and therefore, they do not require filing a T1135.
John Smith buys 200 Company-ABC shares with 120,000 CND on January 15th in his non-registered account at a Canadian online brokerage. Company ABC is a foreign company based in the U.S., and its shares are traded on the New York stock exchange (NYSE). All dividends from the shares are paid into the cash account. On October 15th, John sells 100 shares and realizes a profit of $5,000 CND. No further purchases were made in the year, and the remaining 100 shares dropped in value to 75,000 CND on December 31st .
- John is required to file a T1135, as the shares' cost at some point in the tax year exceeded $100K CND.
- John also must report all the dividends and capital gains he received from these shares. The dividends are considered foreign dividends and are not eligible for the dividend tax credit. Some tax is withheld when the dividends are paid, which John can at least partially recover by claiming a foreign non-business credit upon filing his Canadian return.
- The Canadian online brokerage will issue a "Foreign Securities Report" for John, which will help with his tax filing.
2- Shares of corporations resident in Canada held outside Canada:
This is usually confusing to investors. If you own shares of a company that is considered a Canadian tax resident, but the shares are held in a brokerage outside Canada, then these shares may require filing a T1135 if their cost exceeds $100K CND.
Joanne Smith works in Company XYZ, which is a Canadian company for tax purposes. Part of her compensation package is options and RSUs for XYZ shares. The shares are held in a U.S. brokerage account.
- Joanne is required to file a T1135 if the shares' cost at some point in the tax year was over $100K CND.
- Joanne also must report all the dividends and capital gains, if applicable, from these shares.
- The U.S. brokerage will not issue a "Foreign Securities Report" for Joanne, and therefore, she will have to consult her annual statements to file her tax return correctly.
Clients should distinguish between shares held outside Canada and shares of Canadian Companies Traded on Foreign Stock Exchanges. For example, Royal Bank (R.Y.) is listed on the NYSE in USD, and many clients prefer to buy shares of Canadian companies listed on U.S. stock exchanges because their dividends are paid in USD. These shares are not considered foreign investments.
3- Tangible property:
A real estate held outside Canada is considered an SFP unless it is mainly held for personal use. CRA website has an extensive Q&A about Real Property here. The critical test is whether the property is used primarily as a vacation property and whether the property is rented out to generate profit. It should be noted that vacant land is considered an SFP even if it is not generating income.
Cash held in foreign bank accounts is considered SFP. However, USD cash held in a Canadian financial institution is not considered foreign investments
These are only four common examples of SFP, there are many more. Clients should consult with their tax advisor to determine if they must file a T1135. The requirement to file a T1135 is based on the cost base of the SFP, and therefore, the requirement should be reviewed annually. It should be noted that the cost threshold to file form T1135 applies to all combined SFPs owned by the investor. The CRA example shows that clearly; as follows:
If you hold shares in a non-resident corporation with a cost amount of $75,000, and, at the same time, a bank account in the U.S. with $35,000 on deposit. You must file Form T1135 since the total cost amount of all specified foreign property exceeds the $100,000 threshold ($75,000 + $35,000 = $110,000).
Finally, we should mention that the due date for form T1135 is the same as the due date for personal or corporate income tax returns. It is important to ensure that this form is filed as required, as penalties can be severe.